Did
China really need another casino? The country already
boasts one of the world’s largest gaming meccas in
the form of Macau, the pint-sized former Portuguese colony on
the country’s heaving, bustling southern
shores.

Over the past year, however, perhaps deciding that one was
not enough, Beijing opted to turn its onshore stock markets
into a de facto gambler’s paradise.

Rules that once forbade investors from borrowing on margin
to buy onshore-listed A shares were lifted. Formal brokers and
shadow lenders of all stripes moved swiftly to disburse cash to
the callow day traders – housewives, miners,
white-collar office workers – that comprise the bulk
of the country’s investor base.

Even China’s political leaders got in on the
act. With foreign direct investment waning and
property prices slumping, Beijing needed to find new ways
to fuel its capital-hungry economy.

If the country’s former leader Deng Xiaoping
once shocked hardliners by declaring that to get rich was
"glorious", now the mantra was refined to cater to the
country’s aspiring capital markets. Up (literally)
went the state-sanctioned cry in universities around the land:
"Revive the A shares! Benefit the people!"

Beijing’s reaction to these wild
gyrations was somehow both predictable yet
unexpectedly disproportionate

The result was inevitable. Prices in securities listed on
the main bourses in Shenzhen and Shanghai went haywire. The
value of shares traded on the Shanghai Composite index doubled
between November and June, with the value of some newly listed
shares rising 4,000%.

Then the bubble burst, as they always do. Between mid-June
and July 8, the Shanghai Composite fell 32%. More than 1,400
shares were suspended.

Beijing’s reaction to these wild gyrations was
somehow both predictable yet unexpectedly disproportionate.

This was hardly the country’s first stock boom,
neither its first slump. Valuations rose sharply in 1992, 1993
and 2001 before falling back; in 2007 the Shanghai Composite
more than tripled in value in just 12 months – then
pared back all its gains.

Each time the government acted swiftly,
prohibiting initial public offerings and
freezing the market in its tracks.

This time was different. Again, Beijing slapped a ban on all
planned and ongoing IPOs. But it also broke with tradition by
moving to support valuations, rather than letting stocks find
their own, natural levels.

The intervention then took on a more heavy-handed tone.
Beijing told state-run firms and brokers to buy and hold stock.
On July 9, police visited the country’s securities
regulator, the CSRC, to investigate "stock manipulation".

When that didn’t work, fears grew that the
government reached into its armoury for another bazooka
– after giving the green-light for retail investors to
use their property as collateral for margin loans –
when authorities flirted with deploying their state-run margin
trader with Rmb3 trillion in reserves mid-July.

China Securities Finance, created in 2011 to channel funding
to the margin-trading divisions of mainland brokers, was
reportedly ordered to dip into the fund to buy stocks, offer
liquidity to brokerages, and support the wavering market,
before authorities backtracked, in a rare concession to fears
over moral hazard.

After their rise to power in 2012, Chinese president Xi
Jinping and his premier Li Keqiang spoke often and publicly
about the importance of reforming China’s
sclerotic state enterprises, and its backward financial
system.

They also vested much of their political capital into the
past year’s stock market boom. It was seen by
Beijing as a quick way to boost individual wealth, channel
capital into the maw of young firms, and help larger firms trim
their debts, just as a 25-year economic boom was showing signs
of entering its final stages.

So when stocks stopped rising and started falling, Xi and Li
were presented with their own version of Sophie’s
choice. Allowing valuations to settle naturally would boost
their reformist credentials, while forcing onshore investors to
begin to see equities as a long-term investment tool, rather
than a get-rich-quick scheme.

However, having so tacitly talked the market up, retail
investors fully expected the state to intervene as it bumped
its way down. To not act would be to appear enfeebled and
emasculated, and could have led to social unrest, something
that China’s leaders ultimately could not
countenance.

Inevitably, they plumped for the no-win latter option.

While the Shanghai Composite bounced back, the cost of
Beijing’s muscular interventions should not be
underestimated.

By intervening so heavily, they undermined their own
reformist credentials. By refusing to bow to the invisible hand
of the capital markets, they signalled their distaste for any
type of capital-forming propellant they could not fully
control.

And by acting randomly and impulsively to quell market
volatility, they began to exude a whiff of the scent that no
government, let alone one as controlling as
Beijing’s, likes to emit: panic.

What should have been a simple and reasonably stress-free
market correction has become a nightmare for a government
terrified of chaos and turmoil. It casts doubt on the current
leadership’s ability to act sensibly and
rationally in the event of a genuine, future financial or
economic crisis.

And for the wider world, from institutional investors to
political leaders to commercial lenders, it paints a picture of
a government not entirely confident in its own decision-making,
let alone its ability to control something as inchoate and
arbitrary – and as wonderfully free-wheeling and
meritocratic – as a stock market.

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